In an effort to protect suppliers who sell goods in the days leading up to a customer's bankruptcy, Congress has, via §503(b)(9) of the Bankruptcy Code, carved out special treatment for claims made by creditors who sell and deliver goods to a debtor during the 20 days before a debtor's filing. Although the motive is understandable, the effect on chapter 11 cases has been problematic—in numerous cases, confirmation of a plan is now unattainable, and the new rules have led to manifest disputes between vendor/creditors, many of whom are seeking this special treatment for their claims, and debtors who must obtain funding for and apply this new provision within the existing framework of the Code.
The tension is extraordinary in automotive supply cases because "just in time" delivery requirements employed throughout the industry now yield large numbers and dollar values for administrative expense claims for the goods delivered during the 20-day period. The increased cost and complexity for debtors trying to confirm a plan have prompted debtors to find creative arguments to challenge the validity and timing of payment on §503(b)(9) claims.[2] In Plastech Engineered Products Inc.,[3] a chapter 11 proceeding pending in the Bankruptcy Court for the Eastern District of Michigan, the court is presently grappling with these precise issues and challenges. Although the bankruptcy court has not yet ruled on all the objections to the §503(b)(9) administrative expense claims, the debtor's objections that are based on §502(d) and the Plastech bankruptcy court's analysis of the §503(b)(9) claims is instructive. The bankruptcy court decision that forms the basis of this article is presently on appeal to the District Court for the Eastern District of Michigan.[4]
Plastech Engineered Products, Inc.
Prior to filing for chapter 11, Plastech and its related entities were tier-one automotive suppliers in the business of designing and making blow-molded and injection-molded plastic products. Plastech sold its parts directly to a number of the original equipment manufacturers, including Chrysler and General Motors. Plastech operated out of 36 facilities in North America, employed more than 7,700 people and had annual sales of approximately $1.2 billion to $1.3 billion. As an automotive supplier, Plastech delivered its manufactured goods "just in time" to original equipment manufacturers; Plastech's suppliers likewise delivered raw material or components to Plastech "just in time." Plastech had thousands of creditors, hundreds of whom had delivered goods during the 20 days before Plastech's chapter 11 filing on Feb. 1. Shortly after the filing, Plastech's vendors filed hundreds of §503(b)(9) administrative expense claims totaling $26 million. Plastech has reserved approximately $17 million for the payment of §503(b)(9) administrative expenses under the Joint Plan of Liquidation recently filed with the court.
Plastech objected to the §503(b)(9) administrative expense claims on a number of grounds. Citing §502(d), Plastech has argued that all such claims should be disallowed because any creditor asserting a §503(b)(9) might be subject to a preference action. At the date these objections were filed, however, no preference cases had ever been brought against the creditors. Because this objection was made universally to all §503(b)(9) claims, the court agreed to address this objection first.
Hon. Phillip J. Shefferly, in an opinion issued on Sept. 16, 2008, considered the limited legislative history of §503(b)(9), the cases interpreting §503(b)(9) in other contexts, cases dealing with §503 generally and objections made to disallow claims under §502(d). Finally, the court took a careful look at the construction of §§501, 502 and 503. Ultimately, the Plastech bankruptcy court closed the door (at least for now) on Plastech's §502(d) arguments.
Sections 501 and 502 Govern Assertion and Payment of General Unsecured Claims
Sections 501 and 502 proscribe how prepetition claims are asserted and how they should be treated under the Code. Section 501 requires that claims be filed on a timely basis and limits who can file a prepetition claim. Section 502 describes the process for filing and allowance of claims and, in certain instances, how the amount of the claim is determined. The court noted that §§501 and 502 "work together."[5]
Section 503 Governs Assertion and Payment of Administrative Expenses
The treatment of administrative expense claims is dictated by §503. Like §§501 and 502, §503 proscribes how administrative expense claims are asserted and the circumstances under which they are allowed. The labeling of administrative expenses as "expenses" rather than "claims" is a distinction without a difference. Although unsecured claims as discussed in §§501 and 502 are referred to as "claims" while requests for payment in §503 are referred to as "administrative expenses," they are both types of "claims" as defined in §101(5). Quoting Durango Georgia Paper Co., the Plastech bankruptcy court recognized that:
"[E]xpenses" and "claims" are not mutually exclusive labels throughout all Chapters and sections of the Bankruptcy Code, in that several provisions sweep "administrative expenses" within the "claims" label. These references simply reflect that the Bankruptcy Code's definition of "claim" broadly includes any right to payment. They do not, however, override the more meaningful and specific utilization of the two distinct terms-"expense" and "claim"-within the subchapter in that both sections 502 and 503 are located.[6]
On the other hand, the Plastech bankruptcy court noted that "creditor," as defined in §101(10), is limited by definition to an entity that holds either a prepetition claim or one of only a few postpetition claims identified in §101(10)(B). "Creditor" does not include the holder of other types of postpetition claims that are not referenced in §101(10)(B).[7]
Bankruptcy Code Section 503(b)(9)
A dissection of §§501, 502 and 503 was central to the Plastech bankruptcy court's determination that administrative claims are not subject to §502(d) objections. Section 503 is entitled "Allowance of Administrative Expenses" and provides that an administrative expense claim may be asserted by filing a request for payment thereof. Although "administrative expense" is not defined in the Bankruptcy Code, nine non-exclusive categories of expenses each describe a type of expense entitled to priority under §503(b). Section 503(b)(9) is one of three categories added to §503(b) by BAPCPA in 2005.
Section 503(b)(9) is one of only a few instances where a claim that arises prepetition is treated as an administrative claim. Rarely has Congress authorized a prepetition expense to be elevated to treatment under §503(b). Other instances include the actual and necessary expenses incurred by a petitioning creditor that files an involuntary bankruptcy petition against a debtor, and the reasonable compensation for professional services rendered by an attorney or an accountant to a petitioning creditor.[8] In 2005, Congress added a new category of administrative expense claims-claims allowable by sellers and deliverers of goods delivered during the last 20 days before a bankruptcy filing. These new administrative claims are, however, much more common and of a much higher dollar value in most cases than other administrative claims. It is difficult to imagine that any retail, health care or manufacturing debtor on the verge of bankruptcy is not ordering and receiving goods in the weeks before it files. Moreover, unlike §503(b)(3) and §503(b)(4) claims, §503(b)(9) administrative expense claims apply to all cases, both voluntary and involuntary.[9]
In considering a creditor's claim for administrative expenses under the new §503(b)(9), Schefferly reviewed the developing body of case law on §503(b)(9). To date, courts have considered how §503(b)(9) claims should be asserted, when such claims should be paid and whether a secured creditor may have an allowed §503(b)(9) claim. In In re Global Home Prods. LLC,[10] the court concluded that the timing of an administrative expense payment is left to the discretion of the court based upon prejudice to the debtor, on the administrative expense holder's hardship and the potential detriment to other parties. In In re Bookbinders' Rest. Inc.,[11] the court held that the preconfirmation allowance of a §503(b)(9) claim does not create an "unqualified right to immediate payment." In In re Brown & Cole Stores LLC,[12] the court held that §553(a) allows setoff of a §503(b)(9) administrative expense because the expense is a claim arising pre-petition and mutuality exists).
Is Section 502(d) a Basis to Disallow Administrative Expense Claims?
Section 502(d) provides that, notwithstanding subsections (a) and (b) of §502, the court shall disallow any claim of an entity from whom property is recoverable under certain avoidance actions. The claims included in §502 include prepetition claims and certain postpetition claims that are treated as prepetition claims. As a result, §502(d) is a bar to certain postpetition claims, but only those enumerated in §§501 and 502. The Plastech bankruptcy court explained that if §502(d) was intended to apply to all claims, and not just to postpetition claims governed by §§501 and 502, "it would be wholly unnecessary for §502(d) to say that it applies 'notwithstanding subsections (a) and (b) of §502.'"
Section 502(d) is frequently asserted as a basis in preference complaints to bar payment of a general unsecured claim until the preference case is resolved. Courts have held that §502(d) "is designed to assure an equality of distribution of the assets of the bankruptcy estate...."[13]
To support its argument that §502(d) acts to bar §503(b)(9) administrative expense claims for goods provided in the 20 days before bankruptcy, Plastech relied upon a Ninth Circuit Bankruptcy Appellate Panel (BAP) case, MicroAge Inc. v. Viewsonic Corp.,[14] that considered whether §502(d) applied to §503(b) administrative expenses generally. The creditor, Viewsonic, had been granted an allowed reclamation administrative priority claim in the amount of $574,024. The MicroAge debtor's confirmed chapter 11 plan required it to pay allowed administrative expenses within 10 days after the plan's effective date. MicroAge did not pay Viewsonic's administrative expense, and Viewsonic moved to compel the payment. The MicroAge debtor responded by filing an adversary complaint to recover a preference from Viewsonic in excess of $2 million. In the preference action, MicroAge argued that Viewsonic's administrative expense claim should be disallowed because Viewsonic was liable on the preference claim. The bankruptcy court would not construe §502(d) to disallow Viewsonic's administrative expense because, the bankruptcy court reasoned, §502(d) does not apply to administrative "expenses" but only to "claims."
On appeal, the Ninth Circuit BAP rejected the bankruptcy court's position, noting that $502(d)'s plain language is not limited to disallowance of prepetition claims but, by its terms, applies to "any claim" of an entity that received an avoidable transfer. This is the "distinction without a difference" explained above-both "claims" and "expenses" are claims under §502(d). Moreover, the MicroAge court explained that because §502(d) did not provide an express carve-out for §503(b) administrative expenses, §502(d) could not operate to bar recovery of Viewsonic's administrative expenses even despite the preference action.
The Plastech court rejected the reasoning of the MicroAge court, citing numerous bankruptcy court decisions holding that §502(d) cannot operate to bar recovery of §503(b) administrative expenses. For example, in Roberds Inc. v. Broyhill Furniture,[15] the court found that §502(d) did not bar allowance of administrative expenses where a creditor had refused to pay a judgment against it in a preference action. The court in In re Phoenix Restaurant Group Inc.[16] was not a barrier to the allowance of administrative expense, noting that §502(d) "does not cross-reference or obviously affect the allowance or payment of administrative expenses under §503." In Durango Georgia Paper Co.,[17] the court stated that neither the language of §502(d) nor §503 indicated that the allowance of §503 administrative expenses is conditioned on surviving a challenge under §502(d). The court in In re Lids Corp.[18] found that administrative expenses are afforded special treatment under the Bankruptcy Code and are not subject to §502(d). The court in Camelot Music Inc. v. MHW Advertising & Public Relations Inc.[19] disagreed with the debtor's argument that a creditor must first pay back preferential payments before it can receive payment on an administrative expense, and noted that use of §502(d) to thwart payment of an administrative expense subverted the priority scheme of the Bankruptcy Code to no practical effect.
In the most recent case to consider this issue, In re USA Labs Inc.,[20] the administrative expense holder requested an order allowing and paying his claim for postpetition wages and expenses. The trustee objected on §502(d) grounds because a preference claim was outstanding. The court held that §502(d) only applies to prepetition claims or to postpetition claims that are treated by the Bankruptcy Code as unsecured claims. Furthermore, the court held that the extension of §502(d) to administrative expenses could have devastating effects on the debtor's ability to reorganize.[21]
Conclusion
The Plastech bankruptcy court decision barred the debtor's objections to an administrative expense claim based on §502(d), including §503(b)(9) claims that arise from a creditor's provision of goods during the 20-day period immediately prior to the debtor's bankruptcy filing. This decision is at odds with the MicroAge decision of the Ninth Circuit BAP. The final word is not in, as the district court is considering the issues on appeal.
About the Author: Deborah Thorne is a partner in the Chicago office of Barnes & Thornburg and is an ABI Board member.
Footnotes
1 The author gratefully acknowledges the thoughtful assistance provided by Jennifer Kimball, an associate at Barnes & Thornburg LLP in Chicago.
2 Section 503(b)(9) of the Bankruptcy Code creates an administrative priority for the value of goods received by the debtor within 20 days before the date of commencement of a case where the goods were sold to the debtor in the ordinary course of the debtor's business.
3 In re Plastech Engineered Products Inc., 394 B.R. 147 (Bankr. E.D. Mich. 2008).
4 A number of ABI members were involved in the briefs filed and the arguments made before the Bankruptcy Court for the Eastern District of Michigan, including the author, her partner, Kevin C. Driscoll Jr., and John T. Gregg, Anne Marie P. Kelley and Scott J. Freedman of Dilworth Paxson. Plastech was represented by Gregg M. Galardi of Skadden, Arps, Slate, Meagher & Flom LLP and Deborah L. Fish of Allard & Fish P.C.
5 Plastech, 394 B.R. at 161 (citing Beasley Forest Prods. Inc. v. Durango Georgia Paper Co. (In re Durango Georgia Paper Co.)), 297 B.R. 326, 328 (Bankr. S.D. Ga. 2003).
6 Plastech, 394 B.R. at 159 (quoting Durango Georgia Paper, 297 B.R. at 330).
7 Plastech, 394 B.R. at 154.
8 See 11 U.S.C. §503(b)(3)(A), (b)(4).
9 Plastech, 394 B.R. at 151.
10 In re Global Home Prods. LLC, 2006 Bankr. LEXIS 3608, 2006 WL 3791955 (Bankr. D. Del. Dec. 21, 2006).
11 In re Bookbinders' Rest. Inc., 2006 WL 3858020 (Bankr. E.D. Pa. Dec. 28, 2006).
12 In re Brown & Cole Stores LLC, 375 B.R. 873 (B.A.P. 9th Cir. 2007).
13 Campbell v. United States (In re Davis), 889 F.2d 658, 662 (5th Cir. 1989); Plastech, 394 B.R. at 155.
14 MicroAge Inc. v. Viewsonic Corp. (In re MicroAge Inc.), 291 B.R. 503 (B.A.P. 9th Cir. 2002).
15 In re Roberds Inc., 315 B.R. 443, 476 (Bankr. S.D. Ohio 2004).
16 2004 Bankr. LEXIS 2186.
17 297 B.R. at 330.
18 260 B.R. 680, 683-84 (Bankr. D. Del. 2001).
19 264 B.R. 141, 159 (Bankr. D. Del. 2000).
20 2006 Bankr. LEXIS 2394 (Bankr. S.D. Fla. 2006).
21 Id. at *2.